All Entries Tagged With: "Risk"
Weighing Risk & Reward on Day Trades
August 30, 2011 at 8:48 am
A trader on the email list received a recent video I sent out on stops, and came back with these questions:
“Excellent video, please keep sending more. But how do you determine ‘risk reward ratio?’ Your day trading strategy points to a starting point for a stop loss at 1%, so how do you determine that it has 2-4% of upside potential?”
Great questions! Here’s how I responded…
For most stocks, a 2-4% intraday move is not out of the norm on any given day (especially lately). That’s well within the wheelhouse for most stocks I trade, whereas those without the propensity to move I simply ignore and don’t earmark as trade candidates.
When I do run across a stock that’s more volatile, I’ll cut my size in half and give it 2% from entry, and then expect a multiple of that on the top side (so I’m looking for 4-8% on the profit side to offset the risk).
As for knowing if a stock has that ability to move, for me it’s mostly a feel thing since I’ve traded so many stocks over the years and I watch the market every day, so I’m familiar with their movement to that extent. For anyone who isn’t, even applying a basic indicator such as the ATR (average true range) to a chart will give you an idea of how much that stock moves on a given day. It doesn’t have to get complicated, but that will allow you to structure your trade (or skip it entirely) based upon typical movement.
How do you determine your risk/reward?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Sitting Still
August 10, 2011 at 8:34 am
July 2, 1982 was a special day for Larry Walters. That’s the day the truck driver strapped 45 helium-filled weather balloons to a patio chair armed with a six pack, sandwiches, a camera, and a pellet gun to pop the balloons.
His intention was to go up and look around, but he quickly found himself terrified, having dropped his pellet gun, and over 15,000 feet in the sky in the primary approach path for Long Beach Airport.
When asked why he did it, he simply replied “A man can’t just sit around.”
Lawnchair Larry Wasn’t a Trader
There are multiple occasions when sitting still is the right thing to do in trading.
Sitting still with regard to open positions that are working is definitely a time to be less active. For instance, most of us are familiar with the quote attributed to legendary trader Jesse Livermore:
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
Right now, we’re seeing yet another example of a time when sitting still is a worthwhile approach for traders having a timeframe outside of a couple hours. Volatility is extreme, indecision is running high, and prices are ripping back and forth ’round the clock.
Stated otherwise, it’s really hard to manage risk effectively in a tape like this. It’s a scalper’s dream, but if that’s not you, this is a time to sit still. Let the dust settle, and be patient. Big opportunities are going to result from this.
Do you just head for the couch and flip on the TV with a bag of Cheetos? No!
Work on your game. Clean out your watch lists. Study your trades. Read a great trading book. Get inspired for greatness. Practice Winning. Do anything that will make you better. But don’t just sit around.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Day Trade or Swing Trade? Progression of a Play
July 26, 2011 at 11:21 am
One of the things I’m asked about quite often is how I decide my timeframe for a good setup. Will it be a day trade or a swing trade?
That’s a great question, and it took me a long time to figure that out. I go in-depth in the Advanced Trading Course at TheStockBanditUniversity.com to explain it fully, but one component in the decision is the pattern quality. That’s going to encompass the risk associated with the trade, which means entries and exits are more defined by a cleaner, mature pattern vs. one which is simply building.
So rather than just talk about it, I wanted to show you an excellent example from last week of how a stock can go from being simply a day trade candidate to a swing trade candidate when the pattern matures.
I had run across CROX pulling back from its 7/7 high on 7/11. The uptrend was still very much intact, and this looked to be a potential dip to buy once the dip was completed. Here it was at that time:
CROX needed to be watched a little longer before a play was evident, as I wanted to be able to draw a clean trend line along the highs and then go long on a push through that trend line. Sometimes you have to wait on the market. It took a couple of days, but I finally listed it for subscribers on the night of 7/13 for a day trade the following day. It wasn’t a fully mature pattern, so I was only interested in grabbing the next pop if it occurred the next day (7/14). Here was the setup, which didn’t trigger (it stopped a few cents shy of clearing the trend line, therefore no trigger):
Despite not triggering an entry for a day trade, I kept CROX on the radar nonetheless. After two more daily bars had been painted on the chart, a cleaner trend line could be drawn, and the pullback had the appearance of greater stabilization. I then set up a swing trade since the pattern was more mature, the pivot was more evident, and a stop loss area was now well-defined. Here was the setup I posted for subscribers along with a $26.60 entry trigger price, a $25.70 stop loss (just beneath newfound support), and upside targets at $28 and $29:
From there, CROX triggered an entry on 7/18, dipped for a day on weak volume, then got back on the move. With Target 1 at $28, the stock stopped just a few cents shy of hitting that level on 7/21, creating a bearish engulfing bar. However, I stayed with the trade since volume didn’t confirm distribution, and the following day the stock blew through the $28 first target on much heavier volume.
CROX pushed all the way to Target 2, topping out exactly at $29 on Monday. That offered a nice quick 9% gain, allowing me to book a solid profit ahead of the August 1st earnings announcement (which I always avoid). Here’s a look at the final bar of my trade:
Several takeaways…
Allow setups to determine your trade timeframe. I’ve said it many times, but the smaller the pattern, the shorter the trade should last. Bigger patterns can be trusted for more, it’s just that simple. This started out as a day trade candidate but evolved into a swing trade setup after the pattern grew and matured.
Be patient as patterns build. I stalked this stock for several days before placing a trade. Waiting for stocks to “come to you” is the best way to improve your odds of success. Risk management is crucial, pattern awareness is important, and position sizing is not something to ignore. However, it all begins with making a limited-risk entry, so timing is everything. Don’t rush the process.
Monitor the volume in relation to the price action. This stock made a few moves which, based on price alone, would have made me wonder. The trigger day saw a weak finish. Four days into the trade a bearish engulfing bar could have spooked me out. But neither were confirmed by volume. Instead, I kept seeing volume expansion along with advances in price, which gave me conviction in the trade and allowed me to stick with it.
Stick with good trades and don’t get shaken out. Along with the previous point on conviction, staying with a good trade can be tough. The price action or the overall market activity can cause premature evacuation. Stick with your trade plan and what the overall trade is doing. If it pulls back but volume’s weak, stay with your existing stop. It could just be a head fake on the way to much higher prices.
Hopefully this walk-through helps you understand better how I determine my timeframe for a trade. Beyond that, this review should also give you some insights into managing trades along the way, because learning to assess how a trade is developing is a critical skill you must possess for trading success.
If you want to know what I’m trading tomorrow, stop by the site and begin your trial to our stock pick service.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Taking It to the Bank(s)
July 12, 2011 at 7:49 am
Banks stink. Since February they have stunk. (Stank? Stunken? I’ll figure that out later.)
What’s interesting though, is the overall health of the S&P 500 without the participation of the banks. Generally the banks lead the market, yet they’ve been sliding for months and this market has stayed afloat rather well.
So are the banks no longer important, or is this a signal waiting to be recognized?
Either this market is going to turn and follow the banks, or the banks will at some point turn and add another layer of strength to this market. What’s your take? I’ll give you mine down below. Let’s look at a few of the majors…
BAC – It’s difficult to locate a more methodical downtrend anywhere in the market than this.
C – One-for-ten reverse split included, this one has gone nowhere but south. See that downtrend line? Yeah, so does everyone else. But why isn’t anyone talking about it?
WFC – This one has had glimmers of hope and potential stabilization a few times, but in every case it has failed to do anything but produce new lows. Lower highs: check. Broken rising trend lines: check.
JPM – Bounces continue to get sold here as well. Why even think about getting long until that changes?
GS – The money-making machine continues to work its way toward lower levels with lower highs and a downtrend line currently driving it steadily lower. Great company, perhaps, but hideous stock.
MS – Another picture-perfect downtrend which will perhaps at some point end, but not yet. New lows were made yesterday, and while it’s getting ‘cheaper’ it clearly isn’t done yet.
Other brokers like SCHW, AMTD, ETFC and the like are suffering similarly, as are major asset management firms (JNS), other banks, etc. The technical damage in the financial sector is widespread, and while there will be bounces, I don’t think the market will be out of the woods until we see participation from this group.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
YOUR Trading Plan, Part 2
June 14, 2011 at 9:36 am
In Part 1, I put forth some questions that need to be answered by you in order to move forward with any lasting effect. Those help you identify what it is you’re after, what styles you should pursue, and which approaches you should completely avoid. Let’s proceed.
Start With the Basics
Understanding your preferences, biases, needs and availabilities will clarify your basic approach.
For example, if you were trading a retirement account (non-margin, and thus no short selling, and you prefer the long side and capturing segments of uptrends, you’ve got a starting point. You might narrow your focus to a long-only style based on patterns such as resistance breakouts, as well as bullish continuation patterns like bull flags, bull pennants, and ascending triangles. Those are easily identifiable patterns, which is nice, so you should have a steady flow of candidates to suit your needs.
See what I meant in Part 1 when I said trading allows you a custom-designed approach?
Go Big AND Go Home
Next, decide on a risk amount per trade, in terms of potential dollar loss – not in terms of cash outlay. Think in terms of “real risk” or what you’re truly risking before exiting on the downside. This is the amount you’re willing to lose if/when you are wrong.
That sounds negative, but it’s crucial. Whether it’s $200 or $500 or $5,000 doesn’t matter, so long as it’s a suitable amount of risk for your unique situation. The amount itself is of secondary importance to simply having an amount. It’s a starting point for every trade.
Too many traders fail to begin with an amount of risk they can stomach, and they trade too big and pay the price. That’s no good, so always aim to trade within your means so you can survive and make good decisions.
For example, let’s say your risk amount is $200 per trade. This is what you’re willing and able to risk (lose) if the play doesn’t work out.
So take a trade in XYZ with a pattern that suits you, like an ascending triangle pattern. A breakout might be at $18, and a failure might be at $16. So you could go long this hypothetical trade at $18 with a $16 stop. That’s a $2 per share stop, and you’ll risk $200 per trade, so you could buy 100 shares. Easy math. It doesn’t have to be complicated to be helpful to your trading.
See how knowing *the number* for you can help you understand how much to be trading? The strategy itself is based on the pattern confirmation (entry) or failure (stop loss), but your position size comes down to what you’ll risk per trade. Few traders incorporate this into their plan, but if they did, they’d be miles ahead and avoid many painful trading disasters as well.
In part 3, I’ll wrap this up with some specifics for your overall process. Until then, decide on some basics which suit you and figure out your ‘number.’
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Exploit Your Edge
June 7, 2011 at 12:55 pm
It’s a phrase many of us are familiar with as traders…”exploit your edge.” Sounds kinda like a cross between something illegal and something exciting, right?
At the heart of the phrase though, is simply the idea of finding something that works in your trading, and then using it repeatedly to profit over time.
Poker professionals do it, and they can calculate with precision what their odds of winning a hand will be based on the cards they’re holding. That ‘data’ helps them make critical decisions on whether to fold or bet. Acting appropriately on their ‘edge’ will serve to not only keep them at the table, but help them win.
Professional traders aren’t any different – only the scene is. Traders must also know their edge and use it in their decision-making process on a daily basis. Hold or fold? Lighten and tighten? Add to the position? It all depends, but it’s no guessing game for a veteran trader.
Amateurs, by contrast, fail to recognize this. They pay for it, too. Operating on hunches, rumors, and generally utilizing the buy-and-hope “strategy” might occasionally result in some winning trades, but confusion and frustration are the most common effects. Amateurs don’t understand what their edge is, and therefore don’t know how to exploit it to their benefit.
The Proof is in the Profits
I’m big on evaluating trading performance in order to see what can be learned. Sometimes it’s something new, other times it might simply be a reminder of an important lesson.
Periodically on the premium site, the Recent Stock Picks page gets updated to reflect all swing trades and the corresponding stats which go with them. It’s nice to learn from those updates when they occur, specifically for the real value I get from the data provided. Here are a few of those lessons/reminders…
You don’t have to ‘win big’ to win big.
Too often, traders think they need to hit home runs in order to come out on top. Matter of fact, some of them are right, but it’s only because they need to overcome some enormous losses.
The truth is that in trading, hitting singles and occasional doubles can put you in the proverbial ‘Hall of Fame’ as those gains add up consistently. It’s not necessarily easy, but it is pretty simple and far more feasible than trying to nail down the rare home run. Just exploit your edge and watch your profits stack up…you’ll be amazed at what it turns into.
Small losses are crucial.
As I’ve noted here before, amateurs allow their losses to become too large. But what’s really interesting here is that it isn’t because they’re wrong more often. They’re simply wrong bigger.
Amateurs don’t lose small. That’s a grave mistake in this game, and you can’t afford it if you want to last and profit consistently as a trader. Set up some trading rules if you need to, or put a safety net in place, but for goodness sake, just stop it! When you know you’re wrong, exit and look for a new entry. It’s money you’re trying to gain here, not pride.
Streaks happen.
There’s no getting around it – at times you’re going to be red hot and other times you’re ice cold. Personally, there have been stretches where I took hit after hit, simply being out of sync with the price action, but there have also been times when I consistently turned profits.
Every single trader encounters that – pros and amateurs alike – but what matters most is how it’s handled. The amateur fights harder, increases frequency and size, and hopes that just a couple trades will make it all back.
The pro takes a different approach. When I found myself in a funk, I reduced my size accordingly, became more selective, and remained patient. Soon enough, I found myself back in sync with the market’s rhythm, and I was back on track.
So, step up your game if need be, but figure out what your edge is. Only then will you maximize it to your advantage.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Lighten and Tighten
June 6, 2011 at 11:38 am
An absolute commitment is required for some things in life, like let’s say, a social function. Either you’re going or you aren’t, right? However, other things might require a lower level of commitment. Your diet, for example, might currently be more of an “I’m trying not to eat too many sweets” approach right now. That’s what I’d call a partial commitment, where it’s not an all-or-nothing approach.
When it comes to trading though, far too many traders think they have to be “all in” or “all out” of their positions. Nonsense! Think outside the box a little.
On the surface, we know that commissions are so cheap these days that there is no problem with splitting up positions by making partial exits when a situation calls for it, so that shouldn’t hold you back from adopting this mindset.
There are some occasions when it’s very useful for me to either lighten my position size, tighten my stop, or both. Let’s look at some examples of each, and I hope you’ll add your own thoughts to these in the comments below.
Lighten!
* I should clarify that I’m talking here about lightening up on a position mid-trade. This is not to be confused with when to trade smaller.
Lightening up on a position is a way to Defend both my capital and my profits. Whenever I get a poor fill on a trade where my order is executed at a price which is considerably different than my trading plan accounted for, it’s time to lighten up. By definition, the risk/reward profile of the trade has changed (since the entry price has changed and my stop is now farther away), so naturally I need to make an adjustment. This is the scale I use to do that on my swing trades. Doing this keeps my risk in check with what it should be, allowing me to stick with the trade – even if it’s now a smaller amount.
Tighten!
I won’t enter a trade unless I know my get-out (stop loss), but that doesn’t mean my stop never changes. Sometimes the situation changes in such a way that an adjustment is warranted.
Market conditions may necessitate such an alteration to my plan. Suppose I’m long as a limo, and suddenly the complexion of the market shifts to something quite negative. Maybe news breaks or we see a key reversal set in – well, I’m in denial if I think the landscape hasn’t changed. In those cases, it makes sense to tighten my stops on long positions as a way to shore up my risk.
On a per-trade basis though, sometimes the way a stock moves just happens to change, and that can also warrant tightening my stop. Maybe a stock initially breaks out with momentum, but rather than showing follow through or putting in healthy rest, it simply begins to stagnate. Volume disappears, a sloppy trading range sets in, and I start to see a lack of conviction with weak closes in the stock for several straight days. That’s a time when I’ll definitely tighten up my stop, whether in time or price, as the stock simply isn’t behaving in such a way to deserve a long leash.
Both!
My favorite occasions are those which allow me to both lighten my position and tighten my stop. That usually occurs when my first profit target is hit. That’s a spot where the trade has moved enough to warrant booking some gains (lighten), but the stock may not be done running yet. Typically, I’ll have 2 targets, so sometimes there’s still room for additional gains.
At this point, my initial stop is also now a considerable distance away, so it makes sense to tighten it as well (often to breakeven for remaining shares). This way, I’m risking less on what’s left of my position, while still allowing for additional profits if the stock continues to run. Win/win.
** What are some keys you use mid-trade for knowing when to lighten up on your size or tighten your stop? I have a Bandit t-shirt for the best response, so bring the ideas!
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
